3671 ch 7
a contribution margin of $35 means that ____
the firm has to generate$35 in sales to each the accounting break-even point (contributing $35 to profit)
(t/f) the value of real option, if they exist, must be included in capital budgeting analysis
true
sensitivity analysis is also known for
what if / bop
A key reason that makes NPV a superior capital budgeting technique is that it uses _____ instead of ______.
cash flows; profits
What is the basic output of a Monte Carlo simulation?
A distribution of cash flow for each future year
mining operations almost ALWAYS provide
timing options
What is next year's expected cash flow if there is a 50/50 probability that it will be either $10 million or $60 million?
.5 x 10mil + .5 x 60mil = 35mil
what is the total number of inputs that change while doing a sensitivity analysis?
1 (seeks to determine the sensitivity of NPV to a change in a single variable)
Under which of the following scenarios will an option to abandon be a valuable option?
1. possibility of a NEGATIVE future outcome 2. future market conditions are UNPREDICTABLE 3. project's assets can be quickly liquidated at fair values
Monte Carlo Simulation is _____ complicated then scenario analysis
MORE
Which of the following is an example of an option to abandon?
Stopping production of a product if sales fall below a certain level
which of the following is an example of an option to abandon?
Stopping production of a product if sales fall below a certain level
a decision ___ involves mapping the sequential outcomes of various decisions and corresponding probabilities.
TREE
(t/f) while performing sensitivity analysis, we recompute NPV several times by changing one input variable at a time
TRUE (objective is to analyze the impact of the sensitivity of NPV to a change in underlying input values by changing one input variable at a time)
Which of the following pieces of information are required in order to compute NPV?
The discount rate The time horizon of the project Projected future cash flows
what is the decision rule for npv?
accept a project if the npv greater than zero
Modeling industry sales, forecasting probabilities of various market shares, and determining a distribution of sale prices are all used to specify a _____ model for annual revenue in a Monte Carlo simulation
distribution
A decision tree involves ____.
mapping the sequential outcomes of various decisions and corresponding probabilities
which of the following formulas can be used to determine total revenue for a firm using monte carlo simulation
market size x market share x $ per unit
Which of the following are costs related to a doctor's office are NOT fixed costs?
medical supplies and lab reports
in Monte Carlo simulation, specifying a distribution for annual revenue will generally involve which of the following?
modeling industry sales forecasting probabilities of various market shares Determining a distribution of sale prices
Contribution margin refers to the contribution made by each additional unit sold to ___
pretax profits
A firm has a 50 percent probability of obtaining regulatory approval to enter an overseas market. If it enters that market, there is a 20 percent probability of successfully gaining significant market share. What is the probability of successfully entering the overseas market?
10% (.2 x .5)
Compute the depreciation tax shield based on the following information: Depreciation expense = $40,000; Net profit before depreciation expense = $60,000; Tax rate = 20 percent.
20% x 40,000 = 8,000
Compute the NPV break-even point based on the following information: EAC = $20,000; Fixed cost = $35,000; Tax rate = 20 percent; Depreciation = $500; Contribution margin = $1,000.
60 units (see notes)
Which of the following statements are true regarding fixed and variable costs?
Fixed costs per unit will decrease while variable costs per unit will stay constant if the level of output increases. Total fixed costs remain constant while total variable costs increase if the level of output increases.
Which of the following are reasons why NPV is considered a superior capital budgeting technique?
NPV considers all the cash flows. NPV considers time value of money.
A distribution of cash flow for each future year are ______ of a Monte Carlo simulation and a probability for each future year are ______.
OUTPUTS; INPUTS
The ______ break-even point adjusts for time value while the ______ break-even point does not.
PV ; accounting
Which of the following statements is true in the context of comparing accounting profit and present value break-even point?
Present value is superior to accounting profit because it adjusts for time value and considers the depreciation tax shield effect.
break-even analysis determines how low ____ can fall before a project loses money
sales
Corporate managers care about the break-even point because it indicates:
the level to which sales can fall before a project will start losing money
the contribution margin per unit will increase if ___
the sales price per unit increases while the variable cost per unit decreases
What is a real option?
A valuable managerial option that can affect both the future cash flows and feasibility of a project.
